THE SEARCH FOR THE NEXT WELLS FARGO Greg Porter President and CIO - - PowerPoint PPT Presentation

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the search for the next wells fargo
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THE SEARCH FOR THE NEXT WELLS FARGO Greg Porter President and CIO - - PowerPoint PPT Presentation

Nov 13, 2022 150 likes •539 views

THE SEARCH FOR THE NEXT WELLS FARGO Greg Porter President and CIO 5 280 Capital greg@5280capital.com June 2015 5280 Capital 2 Disclaimers These are my honest views as of today I have a position in ServisFirst Bancshares This

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THE SEARCH FOR THE NEXT WELLS FARGO

Greg Porter President and CIO 5280 Capital greg@5280capital.com June 2015

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Disclaimers

  • These are my honest views as of today
  • I have a position in ServisFirst Bancshares
  • This isn’t investment advice
  • You shouldn’t rely on this presentation to make

investment decisions

  • There is no guarantee I am right
  • If you do decide to invest, do your own damn work!

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Outstanding Long Term Performance

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Wells Fargo -- Almost a 50 Bagger

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Recent Results are Rather Ordinary and Track S&P 500

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Wells Fargo is Now a Huge Bank

  • Largest U.S. bank by market cap - $297 billion
  • Ranks 3rd in U.S. in total assets – $1.571 trillion
  • Ranks 2nd in U.S. in total deposits – $1.244 trillion

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Much of Wells Fargo’s Stock Gains Came in 1990-2004 Period

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1990 – 2004 15 Years of Strong Performance

  • Total stockholder return – 21% annually
  • Average ROE of 18%
  • Average earnings growth of 11%
  • Assets grew from $24 billion to $410
  • Significant organic growth
  • Geographic expansion
  • Numerous acquisitions including Norwest acquisition of Wells

Fargo

  • Market cap grew from $2.1 billion to $105 billion

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The Search for the Next Wells Fargo

  • Identify a bank similar to Norwest in 1990
  • Large enough to have some scale and

professional management

  • Small enough to be able to compound

value at high rates for many years

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The Search

  • Sandler O’Neill Sm-All Stars List – 35 banks
  • Raymond James Community Bankers Cup – 31 banks
  • Search for banks with market capitalizations between

$200 million and $5 billion and an ROA > 1%

  • Reviewed over 70 banks

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The Search

  • Two part process
  • Narrow the field to the best of the best
  • Study what it takes to sustain greatness
  • ver time

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The Semi-Finalists

  • Access National (ANCX)
  • Bank of the Ozarks (OZRK)
  • Bryn Mawr Bank Corporation (BMTC)
  • CVB Financial (CVBF)
  • Eagle Bancorp (EGBN)
  • First Financial Bankshares (FFIN)
  • Glacier Bancorp (GBCI)
  • Independent Bank Group (IBTX)
  • Lakeland Financial (LKFN)
  • Pinnacle Financial (PNFP)
  • ServisFirst Bancshares (SFBS)
  • Washington Trust Bancorp (WASH)
  • Western Alliance Bancorporation (WAL)
  • West Bancorporation (WTBA)

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Comparison of Semi-Finalists

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Characteristics of a Great Small Bank

  • High ROE
  • Ability to grow
  • Great management

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Sustainability of a High ROE

  • Lending is mostly a commodity business –

in a commodity environment, the low cost

  • perator is the long term winner
  • Keys to being a low cost operator
  • Cheap funding cost
  • Operating efficiency

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Sustainability of a High ROE

  • Ability to make good loans
  • Empire builders can temporarily inflate profitability

as high growth initially looks profitable

  • Skill only becomes obvious in a downturn
  • Great Recession was the banking industry’s
  • crucible

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The Growth of a Great Small Bank

  • Location is important – can’t grow loans if there is no

demand

  • Both coast, the SE and the SW are growing quicker than Midwest

and Rust Belt

  • Need geographic expansion AND market share growth

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It’s All About Management

Management is the key differentiator between a good bank and a poor one

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Donn Claussen, Chairman of Harvard Illinois Bancorp, caught sleeping during the bank’s Annual Meeting.

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It’s All About Management

Management sets the agenda

  • Cost control becomes a part of the culture

M & A

  • Price discipline and integration skills

Good capital allocation decisions

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No Chuck Princes – nobody is dancing just because the music is playing

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Selecting a Winner

  • Best combination of:
  • Good Management
  • Low cost funding
  • Efficient operations
  • Growth opportunities
  • Cheap stock price

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And the Winner is . . . .

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ServisFirst Bancshares, Inc. (SFBS)

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ServisFirst at a Glance

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De novo bank formed in 2005 Started in Alabama and now expending throughout Southeast U.S. Completed IPO in May 2014 16 branches and a loan production office $4.4 billion in assets $950 million market cap

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Quality Management

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CEO – T

  • m Broughton

Co-Founder of ServisFirst and CEO since inception Previously founded First Commercial Bank in 1985. Built up the bank and sold it to Synovus. Remained at Synovus as regional CEO Owns 2.5% of SFBS Officers and Directors as a group

  • wn 13.5% of SFBS
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Business Model

  • Focus is on commercial banking not retail
  • Loan making and deposit taking
  • Expansion has come from hiring teams of new bankers in

attractive geographies

  • Intense focus on attracting low cost core deposits
  • Ultra low branch count
  • $253 million in deposits per branch compared to national average
  • f $35 million

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ServisFirst is a Low Cost Operator

  • Total funding cost – 38 bps
  • Efficiency ratio – 39% compared to industry average of

around 60%

  • Cheap deposits and efficient operations lead to an ROA >

1.4%, nearly twice the industry average

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Loan and Deposit Mix

5280 Capital 26 Non-interest bearing deposits have grown rapidly Little reliance on CDs

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Consistent, Rapid Growth

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The Growth of ServisFirst

  • All growth pre-2015 was organic
  • Consistently increased deposit market share
  • Early focus was on Alabama
  • Opened LPO in Nashville in 2013
  • Opened Charleston, SC branch in January 2015
  • Completed a small acquisition in February 2015 to enter

the Atlanta market

  • Expect to continue to enter new markets in the

Southeastern U.S.

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ROA and ROE

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Loan Quality

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Valuation

  • Price to book value multiple is high – 2.4X
  • Over reliance on price to book metric is lazy thinking
  • ServisFirst has exceptionally high ROE’s – focus on

earnings power, not price to book

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Buffett on Bank Valuation

  • Buffett interview (talking about Wells Fargo)
  • Q: How do you view tangible common equity
  • A:

“What I pay attention to is earnings power. Coca-Cola has no tangible common equity. But they’ve got huge earnings

  • power. And Wells . . . you can’t take away Wells’ customer
  • base. It grows quarter by quarter. And what you make money
  • ff of is customers. And you make money on customers by

having a helluva spread on assets and not doing anything really dumb. You don’t make money on tangible common equity

  • Q: So what is your metric for valuing a bank?
  • A:

It’s earnings on assets, as long as they’re being achieved in a conservative way.

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The Important Metrics

  • Stock price - $37.00
  • Current market capitalization – $950 million
  • Annual run-rate earnings (Q4 2014) – $2.32
  • Trailing multiple – 15.9X
  • 2015 exit run-rate earnings – $2.86
  • Forward multiple – 12.9X
  • 2014 return on common equity – 16.4%
  • 2014 loan growth – 18%

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Comparison to the Market

  • Market generally puts a lower multiple on bank stocks

than the market as a whole

  • Bank’s earnings are cyclical as loans are written off in recessions
  • ROEs tend to be low
  • Reasons for low bank multiples don’t apply to ServisFirst
  • High loan quality means less cyclicality
  • ROE much higher than the overall market
  • Growth much higher than the market
  • ServisFirst should trade at a premium to the market, not a

discount

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Comparison to other Semi-Finalists

  • Average metrics of semi-finalists banks
  • Loan growth – 12%
  • Cost of funds – 40 bps
  • Efficiency ratio – 51.5%
  • ROATCE – 13.6%
  • Price to tangible book – 2.7X
  • P/E (run rate earnings) – 18.6X
  • Price to pre-tax earnings – 12.8
  • ServisFirst is growing faster, is more efficient, and

generates higher returns on equity, yet its stock is cheaper on every metric.

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Higher Interests Rates Would be Beneficial

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Bank Stock Prices Remain Below Average

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Conclusion

  • ServisFirst could be the next Wells Fargo
  • ROA and ROE are among the highest of all US banks
  • Rapid growth with pristine credit quality
  • Only in 9 markets – long growth runway
  • Stock trades at a forward earnings multiple of only 12.9X

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